by Beth Gaston Moon | April 12, 2012 2:14 pm
The strike price is an important part of the options contract and the only static variable that contributes to option’s pricing. For every stock that’s optionable (i.e., offering options for public trading), there are different expiration dates and strike prices.
|HOW TO TRADE OPTIONS:|
|- What Are Options?|
|- What Are Options Contracts?|
|- Price of Options|
|- How to Read Options Symbols|
|- How to Price Options|
|- How to Read Options Quotes|
|- Understanding Options Risk|
|- Common Mistakes to Avoid|
|- Options Trading Strategies|
|- Choosing an Options Broker|
To reduce confusion, the exchanges typically determine strike prices based on the current stock price. If a stock is trading between $5 and $25, then the strike prices will be in increments of $2.50, such as $5, $7.50, $10, $12.50, $15, $17.50 and so on.
If a stock is trading between $25 and $200, then the strike prices will be in increments of $5, such as $25, $30, $35, $40 and so on.
If the stock is trading above $200, then the strike price will be in increments of $10, such as $200, $210, $220, $230 and so on.
On occasion, you will see $1 intervals for stocks that are low priced but heavily liquid (for example, Microsoft (NYSE:MSFT)). These stocks are usually trading under $50.
Take a look at the charts below to see how strike prices vary.
An option’s strike price is usually one of the primary determinants for which option you choose to buy or sell. For instance, if you think Apple (AAPL) at $580 has a shot of rallying above $600 a share in the next few months, you might want to buy a $600 call with an expiration date of two or more months in the future.
Why is that? Because if the stock goes up to $600 before expiration (and especially if it rallies past it), you’re holding a very valuable opportunity in your trading account.
During the time you’re holding that options contract, you have the right to buy Apple stock at $600 a share while others in the marketplace will have to buy it at the market value, which could be much more than your strike price. Your options contract has secured you the right to buy stock at an agreed-upon price at any time prior to the contract’s expiration.
But remember you have the right but NOT the obligation to buy that stock. If the stock has increased in value, chances are on your side that the value of the option has gone up as well, and others will want the right to buy AAPL for $600. And you can make a profit by selling your call option outright, transferring your right to buy the shares at that price to someone else.
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